As the days get shorter and temperatures fall, people across the western hemisphere are gathering, with some trepidation, predictions about a harsher than usual winter. Business and consumer sentiments have been steadily declining as several economies are staring at a recession, while others are barely scraping through.
Europeans are the worst hit, as almost every month the debt crisis contagion claims more countries. Governments in the region have stumbled or have been voted out, while massive demonstrations have become a daily affair. Grand summits to thrash out rescue and recovery plans have so far delivered little. A growing number of skeptics now believe that a breakup of the Euro-zone, almost unthinkable even earlier this year, is imminent.
Amidst all this gloom and policy intertia, Poland is quietly moving ahead with plans to shield itself from a Euro-zone economy that might slip further. Poland was one of the few European economies that avoided a recession in 2009, and the country still has one of the relatively healthiest economies in Europe. When most European governments have become extremely unpopular, the Poles recently re-elected Prime Minister Donald Tusk with a bigger vote share. And Tusk wasted no time, using his first speech after re-election to the parliament to lay out an aggressive fiscal agenda.
Unlike most other European leaders who have so far been in denial of the gathering storm, Tusk defined the debt crisis in no uncertain terms as ‘dramatic and unsettling’. The government’s proposals cover reforms that policymakers in other countries dread the most. They include extensive tax reforms to plug loopholes and reduce deductions, besides increasing the retirement age and benefits to limit the government’s pension liabilities. To raise revenues, the government has proposed new mining royalties. These measures are aimed at reducing the current 5.6% budget deficit to just 1% by 2015, and the public debt from 52% of GDP to 47% of GDP during the same period.
It is not that Poland is in any immediate danger of following Greece, Irelend, and Italy into a downward economic spiral. Even at the current level, the public debt and budget deficit are far more healthy than its European neighbors in crisis. The Polish economy is still expanding and is expected to grow 2% next year, barring a Euro-zone implosion. The country is in no danger of a credit rating downgrade, and is in fact, expecting an upgrade early next year.
Still, while the country has not adopted the euro despite being a member of the European Union, the increased integration of Poland with the rest of Europe in recent years has made it more vulnerable to a recession in the region. Poland has become a relatively low-cost manufacturing location of industrial components and even finished goods for well-established Western European companies, like the German automakers. Western Europe is the major market for Poland’s resource exports and the country has also increased the export of electricity, after the recent German shutdown of its nuclear plants. A Euro-zone recession would hurt these trade links and detract from Poland’s economic growth.
At the same time, the relatively large domestic consumption in Poland, when compared to neighbors like the Czech Republic or Hungary, provides a buffer against weak external demand. Exports account for only 40% of the Polish economy and 25% of shipments are destined for Germany, the strongest Western European economy. During the 2009 global downturn, increased public spending made up for the fall in private consumption in Poland. This time around though, the government has already committed to restricting its spending and the economy will be more reliant on private spending and investment.
But implementing the proposals will be a challenge. The government’s coalition partners are already worried about curtailing entitlement spending. Poland’s large mining industry is understandably peeved by the new mining tax proposal, and mining stocks have tumbled after the announcement. But the Polish government is determined to forge ahead, and maintains that the fiscal plan will be implemented even in the worst case scenario of a domestic recession next year. As Prime Minister Tusk put it, ‘we will not be able to keep Poland afloat without these steps.’
It will take some effort to convince visitors to the Polish capital Warsaw that all this governmenrt belt tightening is necessary. Luxury sales are booming in Poland and there are visible signs of strong consumer demand everywhere. A highrise sprouting up at the center of the city will be one of the tallest residential towers in Europe and most of it is already sold out. The city has a new Ferrari showroom, ironically in the same building that was once the Communist Party headquarters. However, it seems the Tusk administration is fully conscious of the growing risks in the region and the global economy. If its tough fiscal proposals are a guide, the Polish government is resolute to keep the warm glow of optimism alive even in a harsh winter.
Postcards from Around the World
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